Manufacturing and Trade

May 26, 2005 • Commentary

A typical news report recently spoke of U.S. “manufacturers, battered by years of losing market share to Japanese, Chinese, Korean and other competitors.” That comment reflected two widespread beliefs — that U.S. manufacturing has long been in a state of decline and that imports from Asia are the reason.

These beliefs, in turn, have inspired a flurry of protectionist actions or proposals. The White House suggests quotas on clothing imports from China. Some senators threaten 27.5 percent tariffs on Chinese goods unless Chinese officials can somehow manipulate their currency to make dollars less valuable.

Has U.S. manufacturing been battered for years? On the contrary, U.S. manufacturing output rose 5.7 percent a year from 1995 to 2000, according to the Bureau of Labor Statistics (BLS) — up from 3.7 percent from 1990 to 1995. And the real GDP of U.S. manufacturing increased by 5.4 percent per year from 1995 to 2000, according to the Bureau of Economic Analysis, before the recession of 2001. By 2003–2004, manufacturing GDP was again growing by 4.4 percent a year. The manufacturing component of the Fed’s industrial production index rose 5.1 percent last year.

Manufacturing jobs have not been shrinking because manufacturing was shrinking, but because labor‐​saving devices have greatly increased real output per worker. If jobs had really been lost because of imports, we would have seen manufacturing production shrinking when imports were rising. In reality, U.S. imports grow rapidly only when manufacturing is expanding, as in 1995 to 2000, and shrink only when manufacturing declines, as in 2001. Industrial supplies and equipment account for more than half of all imports.

In 1992, Bill Clinton and Al Gore claimed U.S. manufacturing jobs were being exported to Japan and Germany. Yet U.S. exports rose 6 percent per year from 1990 to 2001– twice as fast as exports from Japan. From 1991 to 2004, Germany lost 25.8 percent of its manufacturing jobs and Japan lost 28.5 percent (according to the BLS), which puts our lesser 20 percent loss of manufacturing jobs into perspective.

Even China lost 8.5 million manufacturing jobs from 1995 to 2003, yet China has replaced Japan and Germany as the trade warriors’ imaginary adversary. Unfortunately, even the most obvious facts about trade with China are as misunderstood as facts about trade with Japan and Germany were a dozen years ago.

The United States is by far the world’s largest exporter, accounting for 9.6 percent of world exports of merchandise in 2003 and about 18 percent of world exports of commercial services. China accounts for 5.8 percent of the world’s exports of goods, and less than 2 percent of services.

China is the third largest source of U.S. imports — far behind the EU and Canada — accounting for just 13.4 percent of U.S. imported goods last year. Besides, oil accounted for 37 percent of the increase in imports over the past 12 months, and we don’t buy oil from China.

Like all “economic miracles,” China’s rapid economic growth began with huge cuts in tax rates and tariffs. Taxes were cut from 40 percent of GDP in 1978 to 19 percent in 1993. Tariffs on imports were cut from well over 50 percent in the early 1980s to 9 percent today (and more than a third of imported goods are tariff‐​free). Since lower trade barriers were critical to progress in China (and India), how could higher trade barriers in the United States have the opposite effect?

A much bigger problem for U.S. manufacturers in the past five years was not strong imports but (until recently) weak exports. Yet U.S. exports to China have more than doubled since 2000 — rising by an astonishing 25 percent a year in the past two years alone. China is already the fifth‐​largest market for U.S. exports.

The problem for U.S. exporters is not that China’s economy is so strong, but that economies of Europe and Japan are so weak. The Organization for Economic Cooperation and Development just raised its forecast for U.S. economic growth to 3.6 percent this year, while cutting its forecast to 1.5 percent for overtaxed Japan and 1.2 percent for the overtaxed Euro countries. Weak economies do not import much — strong economies like the United States and China do.

Although China’s share of U.S. imports has been rising, Asia’s share has fallen to 33.8 percent of U.S. imports in 2003, down from 37.5 percent in 1993. China’s gains in the U.S. market were more than offset by big declines in U.S. imports from Japan and others. But many goods labeled “made in China” are just finished there, after having their most valuable content produced in Japan, Taiwan, Hong Kong or South Korea.

If the frantic political efforts to curb U.S. imports from China were successful, that would merely be a boon to other Asian, European and Latin American nations, who would view artificially restricted Chinese competition in the U.S. market as a wonderful opportunity to raise prices.

U.S. manufacturing firms would then be forced to pay higher prices than rivals in other industrial countries for many essential components that go into making their products. With uncompetitive costs, they could not charge competitive prices, so many would fail. Meanwhile, U.S. consumers would be forced to pay higher prices than before, and higher than those paid by consumers in countries that do not insist China charge them more. That would make American consumers poorer and therefore unable to spend as much as they now do on domestic goods and services.

People from the legislative or executive branch who offer to protect you from low‐​priced goods from any specific country must be presumed to be secretly representing the interests of other countries, pawns of special interests or both.

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